THE Confederation of Zimbabwe Industries (CZI), Zimbabwe’s largest industrial lobby group, has lauded the positive effect of the forex auction market on the economy, saying the system has brought about exchange rate stability, predictability and curtailed inflation.
But importantly, CZI spelled out the cardinal rules that the authorities must follow as well as the pitfalls they need to avoid in order to sustain the current momentum and positive impact on the economy.
Stability of the exchange rate on the auction market, CZI said, has stopped the run of the open market exchange rate and similarly led to low and stable inflation.
The Zimbabwe dollar has recorded successive gains against the US dollar over the last three auctions, after depreciating exponentially from $25 to US$1 on being floated for the first time on the new auction system to reach its lowest point of around $83,39 to the green back.
Zimbabwe’s exchange rate appears to have reached optimum levels of stability in the market-driven auctions with the domestic currency continuing its recent trend of a minute firming, gaining one eighth of a percent in last week’s auction to $81,34.
The Zimbabwe dollar has not traded below $80 since it hit $80,46 on August 4, 2020. And the highest level to date of $83,39 on August 25 is increasingly appearing as the peak of the discovery process in the early auctions.
In effect, the auction rate is now the major determinant of the pricing across the markets, which was previously based on open market rates prior to the introduction of the auction system on June 23, 2020.
CZI also said the gap between the official and parallel market rates had narrowed significantly while access to foreign currency on the auction had greatly improved.
There has been certainty and predictability; coupled with transparency in the allocation of foreign currency by RBZ, CZI said the prevailing situation had shored up the confidence levels in the economy.
“The foreign currency auction has ushered in a breath of fresh air due to the many positives that the economy is deriving from the newly instituted foreign currency management system,” CZI noted.
To sustain and even improve the positive impact of the auction system, CZI noted that authorities needed to abide by some hard and fast rules, including avoiding interfering with the rate or forex allocations.
Attempts to influence the exchange rate and allocations of forex has caused problems in countries such as Zambia and Uganda, as that affected credibility of the auction.
In Sierra Leorne, concentration of forex in the hands of a few buyers and sellers undermined market efficiency, as the handful of players were able to manipulate the market based arrangements.
After failing to maintain monetary and fiscal discipline, the auction system failed in Nigeria, Uganda and Zambia, as they registered budget deficits financed from printing money, which drove money supply growth.
CZI said Zimbabwe needed to find a way around the impediments to external funding support, from International Monetary Fund and World Bank, which negatively impact sustainability of a similar system in Zambia.
Also, frequent changes to the operating rules undermined public confidence in the auction system, occurrences and CZI said authorities in Zimbabwe needed to guard against that. As such, to sustain the positive impact and success of the auction, CZI said authorities must maintain the right balance between money supply and demand, fiscal and monetary discipline and levy taxes and fees in local currency to create demand for the Zimbabwe dollars.
Further, CZI said authorities must ensure that the policy environment is conducive for business so that the production possibility frontier shifts outward, as industry increases production and productivity.